Best Practices: To Fee, Or Not To Fee?

That is certainly the question in SBA lending today.  SBA has long regulated the types of fees that can be charged by an SBA lender to a borrower.  Recently, SBA’s Office of Credit Risk Management (“OCRM”) has been taking a much closer look at participating lenders’ practices in connection with OCRM’s mission to conduct reasonable oversight and enforcement of lenders participating in the SBA loan programs.  In light of this focus on lender fees, a refresher on permitted and prohibited fees under the SBA 7a loan program, may help lenders ensure that they are complying with SBA’s guidelines in this regard.

Permitted Fees:

1. Packaging Fees. Lenders may charge packaging fees to applicants in connection with the preparation of the SBA loan application package.  Fees can be charged on an hourly or a percentage (as limited by SBA) basis and must be reasonable and for services actually performed.  The services performed in connection with a packaging fee must be documented in the Lender’s file.
2. Extraordinary Servicing Fees. Lenders may charge a fee not to exceed 2% (for standard 7a loans) for extraordinary servicing requirements associated with certain types of loans such as construction loans or asset-based loans that require a significant expenditure of time and effort to service.  The fee must be reasonable and cannot be higher than similar fees charged for lender’s similarly-sized conventional loans.
3. Out of Pocket Expenses. Lenders may pass through to the borrower their actual out of pocket expenses incurred in connection with a loan.  Items such as filing and recording costs, search costs, overnight deliveries, appraisals and environmental assessments may all be passed through to the borrower.  However, costs of software or other lender overhead expenses cannot be charged to the borrower.
4. Late Payment Fee. Lenders may charge a late fee not to exceed 5 percent of the loan payment for loan payments that are at least 10 days past due.  These late fees are not guaranteed by SBA and may be retained by the lender if recovered.
5. Subsidy Recoupment Fee. For loans with a term of 15 years or more, if a voluntary prepayment of 25% or more of the loan is made in the first three years of the loan, the Borrower must pay SBA a subsidy recoupment fee of 5% of the prepayment amount in the first year, 3% in the second year, and 1% in the third year.  The fee is for voluntary prepayments only.  If there is any doubt as to whether a prepayment is voluntary, a request may be submitted to SBA for a determination.
6. Assumption Fees. SBA lenders may charge fees for allowing their loans to be assumed by a new borrower.  The fee may be paid either by the existing borrower or the new borrower, must be reasonable and cannot exceed 1% of the loan balance at the time of the assumption.

Lenders should ensure that the fees that they are charging to borrowers are eligible under SBA guidelines.  Fees that are charged that are not in compliance with SBA’s requirements are required to be refunded to the borrower.  For lenders that habitually charge fees that are not permitted, this can become very expensive very quickly.  Lenders should review their policy on fees to determine whether or not they are compliant with SBA guidelines.  For more information on eligible fees on SBA 7a loans, contact Ethan at 267.470.1186 or esmith@starfieldsmith.com.